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9.16 pm
Mr. Bernard Jenkin (North Essex) (Con): Before I start my remarks, I want to return briefly to the disarming honesty of the hon. Member for Wolverhampton, South-West (Rob Marris), who gave us a speech of philosophical exploration that might have been more appropriate at the beginning of a period of Labour Government than towards the end of one. As I reflect on his extolling of the virtues and the role of the public sector in the social and economic life of our country, it occurs to me that I would have greeted his speech more sympathetically if the huge increases that we have seen disbursed on public services, notably education and health, had produced commensurate increases in the quality and output of those services. However, although school buildings may have improved, for example, educational standards have continued to decline.
Let us look at the state of the health service, which is awash with money in my constituency, with the primary care trust desperately disbursing money on this and that little project at the end of the financial year in order to get rid of it. The public sector is apparently completely isolated from the reality that is engulfing the rest of the economy, including the small businesses and wealth creators in my constituency. Having nearly doubled public expenditure on the national health service over the period of this Government, we have hardly seen any commensurate increase in the productivity of the health service. Yes, there have been improvements in health
outcomes and in wages in the health service, and an enormous increase in manpower. However, that increase has not produced the improvements in outcomes, treatment or experiences for patients in the health service that we always expected to see.
As speaker after speaker on the Conservative Benches has demonstrated, and as my hon. Friend the Member for Henley (John Howell) has just ably and articulately described, the Budget is not a best judgment about growth, spending and taxation, reflecting the best interests of this country and our people. It is not even just a missed opportunity to start the rescue of the public finances and restore economic competence. Rather, this Budget is the last, desperate throw of the dice by a Government who are simply playing for time.
Everyone was aware before the Budget that the public finances were in a dire state. The Budget should have provided a clear path to balancing spending and taxation, but it does not do so. The Chancellor has put off such decisions until after a general election. The Institute for Fiscal Studies has devastatingly confirmed that the scale of the deficit next year will be far bigger than the merely cyclical deficit that occurs during a downturn in the economy. Much, if not most, of this deficit is structural.
For years, many Conservative Members warned that the Government were living beyond their means, and urged Ministers to rectify the situation, only to be met with the usual cries about Tory cuts. We heard that again from the hon. Member for Islington, South and Finsbury (Emily Thornberry) this evening. The fact is that the UK and US Governments became convinced that any recession threat could be averted by lowering interest rates, and that it was therefore permissible to go on borrowing against the economic cycle indefinitely. Low interest rates, low inflation and steady growth disguised the unsustainability of the structural debt and the massive trade imbalances that had built up in the global economy.
This was not the crisis of high interest rates and inflation of post-war experience; it emerged in the financial sector that was regulated by the US and UK Governments. Its first symptom was the credit crunch, which might have emerged in America, although the first bank to fall over was Northern Rock, over here. Certainly, the United States Government were responsible for the structural failures in the American financial system, but those failures were replicated in this country in even more extreme form. The UK banks were even more highly geared than their American counterparts. This is a crisis of Anglo-Saxon economic management, as my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) adumbrated, but it is one for which British and American politicians stand jointly responsible, based not least on the utter hubris of their belief that politicians could abolish boom and bust.
Reliance on the City and the financial sector as a driver of economic growth and a source of taxation blinded both Governments to the dangers of the unsustainable bubble in property and house prices and of the level of debt of households, corporations and the Government. After living beyond our means for so long, the public finances could not cope with even a modest recession, let alone with the catastrophe that we now face.
I would say to the hon. Member for Islington, South and Finsbury that this is not the consequence of Thatcherism. Mrs. Thatcher was elected to 12 years of government after coining the phrase that we cannot spend more than we can earn. That mantra was studiously ignored by the present Prime Minister when he was Chancellor. According to Citigroup, even in the second quarter of 2008, the United Kingdom had debts worth 400 per cent. of gross domestic product. If we compare that with our G8 competitors, we see that France comes nearest to that, but it has only 176 per cent.
The Government failed to control borrowing, which was used to fund consumption. Every year, the then Chancellor’s forecasts on borrowing were wrong. In 2003, he said that borrowing for 2003-04 would be £24 billion, but the outturn was £37.5 billion. His borrowing projections in that Budget for the next four years—2003 to 2007—even in a period of stable growth, were wrong again, by £52.5 billion. The present Chancellor is now planning to borrow £269 billion more over the next five years than he was in November, just a few months ago. That damages market confidence that the Government can service their debts and manage the economy effectively. Far from “entrenching a low-debt economy”, as the Labour manifesto laughably promised, Labour will have doubled the national debt to £1.4 trillion, and that is leaving aside all the unfunded and off-balance-sheet liabilities such as private finance initiatives, pensions and so on.
Every child born today assumes a notional debt of £22,500, which is rather more than the Chancellor has put into their child trust fund. For all the commitment of Labour politicians to the growth and sustainability of public spending increases, the fastest-growing public spending programme in recent years has not been education or health, but debt interest. The cost of debt interest is now nearly as large as the entire defence budget, and nobody in their right mind can regard that as a suitable allocation of the national resources. It is paying for today by borrowing from tomorrow, and it is one of the reasons why the British people are so angry with this Government.
Any new Government will have to choose from only three options available to address national debt: inflate our way out of it, tax our way out of it or reduce public spending as a proportion of national income. We have heard many siren voices advocating a dose of inflation, but they invite many more dangers than solutions. The pain of defeating inflation is etched on the memory of this House and this nation, and we do not want to go there again.
I applaud my right hon. Friend the Leader of the Opposition for not ruling out further tax rises, and some will probably be necessary, but he will be all too aware that the scope for further tax rises is limited if we are not to continue to damage the supply side of the economy and the recovery itself. Let us take as an example the 50 per cent. top tax rate, now proposed, and the devastating critique that we heard from the right hon. Member for North Tyneside (Mr. Byers). The 50 per cent. rate is having immediate effect on City salaries, as employers negotiating to recruit people from overseas will have to offer more than they would have done before the Budget to attract that same person to come to the City of London to work in our internationally
competitive financial services sector. In the longer term, it will drive businesses to relocate elsewhere, to lower tax environments.
It is all very well saying that some Scandinavian countries have high personal taxation, but they do not have the internationally competitive financial services sector that we thrive on in this country. They would not attract business of the kind on which so much of our economy now depends; nor would we if we were to set similar tax rates. By all means, the hon. Member for Wolverhampton, South-West can start that debate, but I reckon he is about 30 years behind the curve, unable even to convince the former Secretary of State for Trade and Industry, the right hon. Member for North Tyneside.
The idea that that one tax change will yield an extra £5.3 billion over the next three years is utter moonshine. As business and high earners take flight, Labour has forgotten one of Ronald Reagan’s mantras, which was taken to heart by new Labour in the old days, “You do not make the poor richer by making the rich poorer.” The former Prime Minister, Tony Blair, is reported to be in despair about that particular choice in the Budget.
That leaves spending cuts. The Leader of the Opposition is right to say that in future Departments must be judged not by how much they spend but by how much they save. The real tragedy will be unemployment. A new Conservative Government must make it absolutely plain that any pain inflicted by tax increases or spending restraint is to restore the growth of the economy and of jobs in this country. Once again, a Labour Government will be leaving office with unemployment higher than that which they inherited—
Madam Deputy Speaker: Order. The hon. Gentleman’s time is up.
9.29 pm
Mr. Greg Hands (Hammersmith and Fulham) (Con): It is a pleasure to make a winding-up speech in today’s Budget debate. Remarkably, this Budget has unravelled even more quickly than other Labour Budget disasters of recent years. Friday’s gross domestic product figures laid bare the Chancellor’s recklessly optimistic growth forecasts, which had been made less than 48 hours earlier. With the economy contracting at its fastest rate in 30 years, forecasters and observers were left with little choice but to agree with the Conservatives’ initial reaction to Wednesday’s Budget: the Government are betting the shop on there being a trampoline recovery. Given the dire state of the patient, the recovery they are seeking or predicting appears almost bionic in proportion. With growth projections of 3.5 per cent. for the recovery, they are predicting that in 2011 and two years beyond, the economy will be growing as fast as it is currently shrinking. Given the fact that the shrinkage is at its highest rate in 30 years, we all have to question that forward growth assumption. Given that those forward growth forecasts for two years did not even last two days, we must register our severe our doubts.
Today we heard a few Labour Members setting out to blame Baroness Thatcher for the current recession. We heard reasons such as the big bang, right to buy and encouraging home ownership. We even heard about her abolition of currency controls as being one reason for the current recession.
One Labour Member did not blame Baroness Thatcher for the recession—the right hon. Member for North Tyneside (Mr. Byers). In a devastating speech, he asked about the 50p tax rate, warning that focus groups may sometimes be wrong. He called the rate “more to do with political positioning” than raising revenue, an extraordinary and significant attack on the Government. He reminded everyone of the breaking of the Labour manifesto pledge. I recall Tony Blair standing at the Dispatch Box and attacking the Liberal Democrats many times for proposing a 50p top tax rate. That will come back to haunt the Government.
We heard from other Labour Back Benchers. The hon. Member for Barnsley, Central (Mr. Illsley) attacked rises in alcohol duties and the tax on bingo, to which I shall return. On a rare occasion, we heard from the right hon. Member for Banff and Buchan (Mr. Salmond). I thought for a moment that perhaps he was clocking in a few weeks too early and was not up to date with the news that the scheme has been scrapped. In a good speech, he talked about Labour’s “reverse stimulus”, and predictably he attacked Trident. However, he seemed to be saying that Labour is spending too little, which was interesting.
The hon. Member for Gloucester (Mr. Dhanda) started off with a number of erroneous claims about my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), although he balanced that with some criticism of the Budget. I share the opinion of many in the House that the Prime Minister was wrong to sack the hon. Gentleman last year. I happen to know quite a bit of the background of the case, because it was over a planning application in my constituency. I think that the hon. Gentleman made the right call on that, and the Prime Minister made the wrong call to sack him.
My hon. Friend the Member for Mid-Sussex (Mr. Soames) gave a packed but excellent speech, describing an economy in ruins. He offered a comprehensive critique of the past 12 years of Government policy on pensions, borrowing and tax complexity and of failures in manufacturing.
Although the calls by the hon. Member for Luton, North (Kelvin Hopkins) for national protectionism, exchange controls, even more debt and even more punitive taxation will get marks for bravery, I am not sure that they will find much favour on any Front Bench.
We had an excellent and passionate speech from my hon. Friend the Member for New Forest, West (Mr. Swayne), who called the Budget post-dated. He described the harsh reality facing small businesses in his constituency, made a plea for savers and called for more scrutiny of quantitative easing.
The hon. Member for Islington, South and Finsbury (Emily Thornberry) talked about her early career as a barrister, which started in Poplar job centre. I thought that she could be a role model for some in her constituency during this particular downturn, reminding us that miracles do happen.
My hon. Friend the Member for Lancaster and Wyre (Mr. Wallace) made a detailed speech on the importance of innovation, intellectual property, and science and technology, especially in the aerospace industry. We had another excellent speech from my hon. Friend the Member for Banbury (Tony Baldry), who pointed out that almost no Labour Members were here to talk about the Budget.
He concentrated on public finances and reminded us what the IFS had said about the two Parliaments of pain that are expected to come. He gave Labour Members some home truths about their dishonest Budget. My hon. Friend the Member for Beverley and Holderness (Mr. Stuart) also pointed out a number of dishonesties in the Government’s Budget, and put this terrible Budget in to its proper historical context.
The hon. Member for Wolverhampton, South-West (Rob Marris) made a thoughtful speech on the size of the state, the importance of wealth creation and whether we are getting value for money from our public services. Conservative Members would certainly welcome that debate.
My hon. Friend the Member for Poole (Mr. Syms) drew some interesting international parallels with Germany and California. Interestingly, he was the first speaker in today's debate to use the phrase “boom and bust”. Not so long ago, “boom and bust” was normally the phrase that started each Budget debate. It was used by the then Chancellor, the current Prime Minister, who claimed that he had effected its abolition.
My hon. Friend the Member for Henley (John Howell) made an excellent speech mainly about SMEs. He reminded me, and many others, why we campaigned so hard for him to be elected to the House more or less a year ago today. My hon. Friend the Member for North Essex (Mr. Jenkin) analysed the deficit and the debt in some detail and rightly called the Budget “a desperate last throw of the dice”. It has been a fascinating debate.
Very few businesses will have been fooled by the very few goodies that they were offered on Wednesday. Most will have been left reeling at the thought of how much business taxation might have to rise to pay for Labour's profligacy. The Chancellor set great store by some of those measures, but each of them was dwarfed by the appalling borrowing figures. He announced in just 93 words the borrowing of £703 billion, yet it took more than 2,500 words to outline the new sweeteners.
Some of those measures were long overdue. We heard about the £50 million on forces’ homes, the £100 million to local authorities for energy-efficient homes and the £500 million in incentives to the construction industry. That dwelling on the good news and the covering up of the bad news has been a characteristic of new Labour Budgets, but let us dwell for a moment on the relative sizes of the good news and the bad news. For every pound earmarked for the construction industry in the Budget, £1,400 was announced in new borrowing. For every pound on energy-efficient homes, we heard of £7,000 in borrowing. For every pound earmarked for much needed forces’ accommodation, £14,000 was announced in new borrowing.
The main story of this Budget is debt, and I want to dwell on that particularly in my remarks—some of the dangers to which the UK economy is exposed by these massive levels of borrowing. When the Government announced £703 billion of new net debt on Wednesday, with £220 billion to come in gross debt this year, the market more than shuddered. There is an assumption in Government circles that the ability of the market to absorb debt is infinite. I worked for a large part of the ‘80s and the ‘90s in the fixed income markets. It is true that Governments are less likely to default on payments
in their domestic currency debt than many observers in the press might think, but that does not stop the market from making it extraordinarily expensive to borrow, and at the moment, it is expensive to borrow.
Although absolute levels for gilt yields are not high by the standards of some previous recessions, the yield curve is incredibly steep. Anyone who has worked in fixed income knows that interest rates are best viewed proportionally, rather than linearly. In other words, a rise from 0.5 per cent. to 1 per cent. can be as significant as a rise from 10 to 20 per cent.
The current gilt yield curve sees rates rising from 0.5 per cent. to 4.5 per cent., which means that long-term rates are an incredible nine times as high as short-term rates. We know that all world yield curves are currently steep, but none is as steep as the sterling curve. Some implied forward interest rates are truly astronomical, which means that the market is saying that borrowing costs in the future will be very large indeed, especially real borrowing costs—in other words, relative to inflation. Those high borrowing costs will have an impact on taxation and spending in future years.
Let me give one example from a local authority where the opposite happens, my own council of Hammersmith and Fulham. A large part of the reason that we have been able to reduce council tax is that, by repaying £20 million of long-term debt, we have been able to save around £1.7 million each year in debt interest payments. Therefore, it is not just the ability of the gilt market to absorb all of this paper. We need to ask the question: what will the market charge for the borrowing?
Let us think for a moment about some of the potential buyers of that £703 billion of new gilt issuance. As the Leader of the Opposition told us on Wednesday, borrowing in the next two years will be more than was borrowed by every previous Government combined. We are dealing with absolutely huge numbers.
Many have been tempted to assume that foreign investors will take up some of the slack, and on that I wish to turn to the related question of the strength of sterling, which curiously received no attention in the Chancellor’s speech—the word “sterling” did not appear at all. Foreign investors may take some of this huge level of new issuance, but it is worth somebody in the Treasury noting that foreign investors have just taken a 20 to 25 per cent. hit on the foreign currency value of their existing gilt holdings just last year—these foreign investors might well be once bitten, twice shy.
Thanks to Labour’s economic policies, sterling is already very weak—UK visitors abroad will feel that this summer. Some of the effect will be camouflaged by the move by favourite continental holiday destinations to the euro, but those who, as I do, remember over many years getting 10 French francs or three deutschmarks to the pound would be amazed to learn that they would now receive 7.35 and 2.24 respectively. There are other reasons to be concerned over the future prospects of sterling. One of the consequences of the otherwise welcome recent reductions in UK interest rates is that it is now very easy to short sterling; sterling is very cheap to borrow in the short term. The famous Yen carry trade—borrowing in a low-yielding currency to invest in a high one—can now be done with sterling. The risk with the Yen carry trade was always that the Yen would
appreciate, but it is harder to see that risk occurring with sterling. That is where I see some of the forthcoming risk.
I just wish to mention two or three other things in the short time available. First, I believe it to have been an anti-London Budget. I can tell the House that when I headed back to my constituency on the tube last Wednesday evening, I saw some long, drawn faces in the carriages; anybody who was talking, had only one topic of conversation: how awful the Budget was—that was even true of the Chelsea fans on their way to the stadium. The Evening Standard called this
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